A recent Freedom of Information Act request revealed that, by the end of last year, there had been no prosecutions and only nine live HMRC investigations into the offence of failure to prevent the facilitation of tax evasion (also known as the Corporate Criminal Offence (‘CCO’)). The CCO has been in force for over three years and was unveiled with much fanfare. The absence of HMRC activity is therefore striking. It is especially striking in light of recent developments in the law of dishonesty and the strong public support for punishing companies perceived to be evading tax.
This article explores this paradox. It is not concerned with cases that have always been considered to constitute tax fraud, such as forged expenses claims or undeclared cash takings. It is concerned with tax planning devices or structures that are now at greater risk of scrutiny by HMRC. Where it can be argued that the net has never been wider, why is there so little activity in investigating or prosecuting the COO?
Dishonesty – a moving target
In recent years, the line in the sand dividing criminal tax evasion and non-criminal tax avoidance has, if not washed away, moved far closer to the feet of those who engage in aggressive tax structuring. The concept of dishonesty in criminal law, a key feature distinguishing, on the one hand, tax planning that might be considered sharp, and on the other, tax planning that involves fraudulent evasion, has now become easier for prosecutors to establish to the satisfaction of a jury.
The legal test for dishonesty which had been put to juries since the case of R v Ghosh in the early 1980s was twofold: (a) was the conduct dishonest according to the standards of ordinary, reasonable and honest people? and if so, (b) did the defendant know that, by the standards of the ordinary person, the conduct was dishonest? The first limb of this test was an objective standard, one that eschewed definition or refinement, relying on an ordinary person’s sense of right and wrong. Critically for those accused of crimes of dishonesty, the second limb of this test was subjective. Whilst this second limb was infrequently solely relied upon, many defendants hoped that the jury would acquit them having taken into account what they asserted to be a genuinely held belief in their honesty. However, recent cases have developed the test for dishonesty so that, by and large, subjective elements are no longer relevant.
The first case in which clarification was sought to the test for dishonesty arose from the rate-rigging scandal in the banking sector. Tom Hayes was convicted of conspiracy to defraud Yen LIBOR and appealed his conviction on the basis that the judge misdirected the jury in respect of the test to be applied when considering whether he had behaved dishonestly. He argued that, in considering the objective limb of the test, the jury should have been asked to consider whether someone in his industry would have considered that his conduct was dishonest. Therefore, he should be judged by the standards of an ordinary person, but an ordinary person with his particular professional experience. While such an argument carries a certain logic, it was nonetheless an adventurous application; the Court of Appeal found that there was no authority to support it and concluded that “from time to time, markets adopt patterns of behaviour which are dishonest by the standards of honest and reasonable people; in such cases, the market has simply abandoned ordinary standards of honesty.” The suggestion that market practice or, to put it another way, industry norms should play a special role in determining the objective question of whether conduct was dishonest was therefore rejected.
Whilst the decision of the Court of Appeal in Hayes did not change the scope of dishonesty, being simply a rejection of an attempt to broaden it, the second case brought a profound change to the test that had been applied for over 30 years. In the civil case, Ivey v Genting Casinos (UK) Ltd, the Supreme Court declared that the two-limb test in Ghosh was wrong. In fact, all that was required to determine whether a person had been dishonest was proof that his conduct was dishonest according to the standards of ordinary, reasonable and honest people. Whether a defendant appreciated that he was dishonest was irrelevant. Otherwise, people without a moral compass, but behaving in an otherwise thoroughly dishonest way, may be acquitted. In contrast to Mr Hayes’s application, which restated the law as it was widely understood, the Supreme Court’s articulation of dishonesty represented a substantial shift from decades of practice. Notwithstanding this was an obiter comment in a judgment of civil law, it was immediately followed in criminal courts; juries were pulled out of deliberations to be re-directed under this revised test. The test set out in Ivey was recently confirmed in the Court of Appeal in R v Barton and Booth, where it was held that “dishonesty [is] assessed by reference to society’s standards rather than the defendants’ understanding of those standards.”
The combined effect of these cases is that conduct which professionals facing a criminal prosecution may otherwise have thought was defensible on the basis that it was industry standard and in which many other practitioners in the same industry engaged, must now be critically re-evaluated. Because the requirement to prove dishonesty sits at the heart of nearly every criminal tax offence (only a handful of criminal tax offences require proof of recklessness or another state of mind), the prosecution of tax fraud should, at least in theory, now be easier.
This shift towards objectivity, the standards of the ordinary person, is all the more acute in light of the hardening of public sentiment in the field of tax planning. After the last financial crisis of 2008, the government’s “we’re all in this together” rhetoric was underpinned by the notion that everyone, including corporates, should pay their fair share. Tax planning, once a private or commercial matter, became a moral issue. David Cameron’s criticism of celebrities engaging in tax avoidance schemes was a surprising move for a Conservative prime minister, but one that we can expect to see again as the Chancellor looks for ways to increase the tax take to aid the exchequer’s post-pandemic recovery. Given these developments, the question of what an ordinary, reasonable person on the Clapham Omnibus (or more importantly an ordinary, reasonable juror) regards as honest is likely to have shifted in a way that is uncomfortable for those involved in tax planning. Professional tax advisors will not be judged by their peers. Their subjective view that their conduct falls short of dishonesty but is instead innovative, sharp or simply characteristic of the ingenuity which they clients demand from them, is no longer relevant.
The CCO through the new lens of dishonesty
These developments concerning dishonesty are relevant to the CCO. Take the example of a private wealth professional firm or tax advisory business. It will be at risk of investigation for the CCO where one of its clients has been involved in criminal, dishonest tax fraud and there are grounds to believe that a person associated with the business has also played a dishonest role. The following summarises the three stages of the CCO, all of which must be proved, insofar as the CCO relates to tax planning:
- Stage 1: there is criminal tax evasion by a taxpayer, who is the client of the business;
- Stage 2: there is criminal facilitation of the tax evasion by a person ‘associated’ with the business, who is likely to be a member of staff, but who could be someone with a more remote connection; and
- Stage 3: the business failed to implement reasonable procedures to prevent its associate from committing the criminal facilitation act.
A conviction at the taxpayer level (stage 1) should now be easier as a result of the refined test for dishonesty. But such a conviction is not a pre-requisite to bringing a prosecution against the business for the CCO. For example, HMRC can offer immunity to a taxpayer who voluntarily comes forward and makes a full and complete disclosure of all unpaid tax liabilities, provided the disclosure is accompanied by an admission of fraud. If the taxpayer’s confession became part of the prosecution case against the business, it would constitute sufficient proof, to the criminal standard, that the taxpayer level offence had been committed. In these circumstances, establishing stage 1 of the CCO would be relatively straightforward for HMRC.
The associated person (stage 2) must have deliberately and dishonestly taken action to facilitate the taxpayer-level evasion, so again, proving this conduct is now easier as a result of the narrowing of the dishonesty test. Examples of facilitation offences include being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of tax by another person (e.g. s.106A Tax Management Act 1970) or liability arising under the usual principles of accessorial liability (e.g. aiding, abetting, counselling or procuring the commission of a UK tax evasion offence). If the associated person is only proved to have accidentally, ignorantly or even negligently facilitated a tax evasion offence, the CCO is not committed. Nonetheless, when considering whether the associated person has been facilitating tax evasion, a more critical analysis of whether the associated person’s advice or conduct was dishonest must now be applied, according to the purely objective test for dishonesty propounded in Ivey and accepted in Barton and Booth, taking into account the ordinary person’s perception of the honesty present (or absent) in tax planning.
The application of this narrower test must also be considered when evaluating stage 3; whether the business has reasonable procedures in place to prevent its employees or associates facilitating tax evasion. In evaluating whether its procedures might be considered reasonable, a business cannot take comfort from the fact that its employees are engaging in the type of sophisticated tax planning which characterises the industry. Those formulating reasonable procedures on behalf of the business are faced with a dilemma. In an industry where there is demand for the most effective advice (or to put it another way, the advice which saves the most tax) taking an overly safe view may be bad for business. While this dilemma may sound familiar from complaints made about similar legislation such as the Bribery Act 2010, the analysis of dishonesty in the CCO is more nuanced (dishonesty is not a requirement of the corporate bribery offence in the Bribery Act 2010). It is harder to predict what an ordinary person may consider is dishonest in the context of tax planning, or a profession or trade that is unfamiliar to them, than it is to predict whether they will consider a payment is made with the requisite intent to be a bribe.
So why so few CCO cases?
To summarise: where a taxpayer receives immunity from prosecution for ‘handing themselves in’ for what is accepted to be tax fraud, a criminal investigation into whether the business which advised the taxpayer committed the CCO may be closer than many in the tax planning industry may think. Which returns us to the paradox: since its introduction on 30 September 2017, there have been no prosecutions for the CCO. On 10 February 2020, in response to a Freedom of Information Request, HMRC revealed that, as of 31 December 2019, there were only nine live investigations of the CCO with a further 21 opportunities ‘under review’. About a year earlier, HMRC had revealed that there were five open investigations. As none of these resulted in prosecutions or a deferred prosecution agreement, either all five have concluded without any action being taken, or one must assume that some or all of them are included in the current nine cases. Either way, this is a strikingly low figure.
It is likely that there will be more on the horizon. The CCO was introduced with great fanfare following the government initiative of ‘No Safe Havens’, which was directed at clamping down on offshore tax evasion and as part of a wider international initiative launched as part of the UK’s G8 presidency to increase tax transparency. It is difficult to know why enforcement has been slow. However, as the cost of the pandemic is counted and the government seeks to rebalance the books, HMRC may well be directed to redouble their efforts and not shy away from deploying the legislative weapons at its disposal. HMRC’s current reluctance to prosecute the CCO may be about to change.
  EWCA Crim 2
 R v Hayes  EWCA Crim 1944
  UKSC 67;  3 WLR 1212
  EWCA Crim 575